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Baltic Dry not the only way for shipping managers to find profits

By: | 14 May 2012

The Baltic Dry may be around 25-year lows, but shipping fund managers say that their fortunes are not tied only to this one index

Rates to charter ships carrying dry goods have fallen sharply since 2008, providing some very testing times for funds financing such activity.

The Baltic Dry Index (BDI), which measures the cost of dry shipping goods globally, fell for 29 straight trading days to 31 January, continuing a 25-year low, despite increases in costs for hiring some shipments to China.

Before 2008, numerous larger ships were built – at peak costs – but the collapse in trade since 2008 left an industry sharply oversupplied.

At least ten funds in ­Germany’s €51bn community went ­insolvent since 2010, according to the ­Association of Non-Tradable ­Closed-End Funds. One practitioner estimated recently up to 150 face various levels of financial pressure.

In ship shape?

But managers point out the BDI is just a ‘snapshot’ of charter rates, whereas they can secure rates years ahead in their notoriously cyclical industry. Shipping equity fund managers add that resurging shipping shares suggest the market foresees kinder economic conditions ahead.

Felix von Buchwaldt, chief ­execuitve of Hamburg’s Nordcapital Group, acknowledges that the BDI’s “very low level” at present is “very ­difficult for this part of the industry”.

But he adds ships can be chartered at rates set over very long periods – a few months to 15 years is not unusual – and longer-term contracts will be much less affected by negative charter market developments.

He calls setting the length of the contract of a vessel the most effective way of creating an ‘income-hedge’ against challenging times. He adds: “One of the greatest difficulties that has arisen in recent years is the ­reduction of charter income – in principle, of ‘day rates’ for vessels which have to be re-employed in this demanding market environment.”

Nordcapital has many ships with contracts of between five and 15 years “that have not noticed anything from this market ­environment,” von B­uchwaldt says.

From its inception to the end of 2011, Nordcapital initiated 100 funds with 122 ships. Its latest product, with the container ship Bendetta, has charter rates set for 15 years.

Von Buchwaldt says financiers can also create portfolio funds which finance a diversified fleet of vessels holding a staggered series of contract lengths. Another alternative is ­so-called “charter income pools”.

The income received from the charters is pooled in this model, and should be smoothed because the ships and charters included will have different periods and re-delivery windows.

A pool with many ships can also offer exposure to v­essels globally, from the Far East to Europe to a strategic customer – “a big advantage compared to a single vessel”.

One equity index of shipping companies suggests fortunes for the troubled industry might be turning.

Jamie Farmer, executive director at Dow Jones Indexes, says the Dow Jones Global Shipping Index, ­reference for the Guggenheim ­Shipping ETF, is up 20.3% this year to May, about twice the 10.2% rise of the Dow Jones’ Global Total Stock Market index. But it fell 39.7% last year, compared to the 10.2% decline of global shares.

“The companies in the index tend to perform well in an environment where ­economic recovery has begun, and there is shipping of dry bulk goods, commodities for construction and finished goods,” Farmer says.